In today’s lesson, we will be completing part 2 of our review of budgeting.
In the last episode, we focused on our expenses and we provided some tips on getting started on a personalized budget.
Today, we will discuss how our income informs the development of our budget. We will finish the two-part lesson with a sample budget.
Our objectives for this lesson are to:
Explore sources of resident income
Introduce the difference between gross income and net income
Review an example budget to help get you started
Income
Let’s consider a resident’s income.
Like expenses, income can be broken down into two sources: fixed and variable
Fixed income reflects income that does not change month-to-month
For residents, this will typically be our base salary. However, if you have other consistent sources of income, include them here.
Variable income is less reliable month-to-month. Variable income sources through residency may include things like:
Call stipends
Moonlighting
Side gigs such as signing up to be an OSCE examiner, or income-earning hobbies
It’s best to be as accurate as possible in defining income so that you know exactly how much cashflow you have at your disposal each month.
To this end, keeping track of all income, including income-tax returns, bursaries and scholarships, and monetary gifts should also be included in variable income
Simply put, your income is how you support your expenses.
By knowing what you start with each month, you are less likely to formulate a budget that spends beyond your means
A challenge is predicting the contribution of variable income each month. As such, it is generally recommended to budget for the bulk of your expenses using only your known fixed income. Some variable expenses can then be adjusted based on variable income.
Gross Vs Net Income
Let’s now turn our attention to a very important concept – the difference between gross income and net income.
In future lessons, we will learn about reading our pay stubs and will further discuss the difference between gross and net income.
As an introduction, gross income reflects your total income earned before any deductions.
Common deductions include taxes, health & dental benefits, and union dues.
Net income reflects your take-home income after deductions. It is the true reflection of your monthly cashflow. Therefore, it is critical that you use your NET income when creating your budget.
For example, Tom makes one hundred dollars selling apples. He owes 20% in taxes and an additional ten dollars in benefits and union dues.
Tom’s gross income is one hundred dollars.
His net income is one hundred dollars minus 20% (or twenty dollars), minus a further ten dollars, which equates to seventy dollars of net income.
If Tom builds a budget based off of one hundred dollars in income, he will be spending beyond his means by thirty dollars every month and will quickly accumulate more debt!
This can be a bit tricky to figure out for yourself. To help you, we’ve developed a Take Home Pay calculator that will calculate your actual bi-weekly and monthly take home pay for you based on a few simple inputs. Check it out if you are starting a budget.
Example Budget
Now that you have an idea of common resident expenses and income, let’s work through an example budget.
Kate has spent two months tracking her spending habits. She has broken down her fixed expenses as follows:
Rent = $2,000/month
Utilities = $100/month
Internet = $50/month
Groceries = $400/month
Disability Insurance = $100/month
Car insurance = $120/month
Phone bill = $80/month
Gym membership = $50/month
Total fixed expenses = 2,900
Kate has a base salary of $62,000. After taxes and deductions, she calculates a net fixed income of $50,000. This equates to approximately $4,160 per month. She does not have dependable variable income, so it is left out of her budget, for now.
Kate also has $100,000 in debt. This year, she would like to contribute $750 per month towards this debt.
Using the strategy of “paying yourself first,” she allocates this as a fixed expense titled “debt contribution.”
Kate’s new Total Fixed Expenses = $3,650 per month
Kate sees that she has $510 per month leftover for her variable expenses.
Based on her values, she lists the following budget for variable expenses:
Eating out = $100
Coffee = $50
Alcohol = $50
Entertainment = $50
Transportation & parking = $150
Health, Wellness, Shopping = $100
Total Variable Expenses = $500
While the budget feels tight, Kate remembers that she expects to earn some call stipends on top of her fixed monthly income
Additionally, since she has already budgeted for her fixed expenses and long-term financial goals, Kate feels comfortable manipulating her variable expenses month-to-month based on her total NET income, including variable income.
Kate also knows that for every coffee brewed at home and for every day she can bike to work, it’s more money available for variable expenses, savings, and future goals
What’s more, she also remembers that she will get money back on her income-tax return and that her base salary will increase each year, which further solidifies her confidence in her budget.
Finally, notice that by NOT consistently allocating her variable income to her expenses, Kate has developed a built-in cushion of cashflow for one-off expenses and life’s surprises.
While living like a resident now, Kate is comfortable knowing she has set up spending habits that align with her values and long-term goals.
Figuring out a budget might seem a bit tough. To help you, we’ve developed a Budgeting Calculator that will help you develop a monthly budget based on common expenses. Check it out if you are starting a budget.
Remember, while budgeting takes work, if broken down into digestible pieces, you might just find that it:
Helps develop spending habits that align with your values
Automates the process of addressing your financial goals
Positively impacts your relationship with money
We hope you have enjoyed these lessons on budgeting.
We encourage you to get started on your own personalized budget by:
Tracking your spending habits
“Paying yourself first” by clearly outlining your long-term financial goals
Allocating fixed income to the bulk of your expenses, then enjoying what variable income is left over however you like!
Get started using our Take Home Pay and Budgeting Calculators, available on the Financial Pulse Website.
Stay tuned for our next lesson on reading your pay stub!
Understand the process of setting a personal budget, Part 2
Welcome back to the financial pulse.
In today’s lesson, we will be completing part 2 of our review of budgeting.
Our objectives for this lesson are to:
Income
Gross Vs Net Income
Example Budget
Remember, while budgeting takes work, if broken down into digestible pieces, you might just find that it:
We hope you have enjoyed these lessons on budgeting.
We encourage you to get started on your own personalized budget by:
Stay tuned for our next lesson on reading your pay stub!